Wednesday, April 09, 2008

Respite

With all the bad news that is coming out you would think the stock market would be crashing. It never works that way. In fact the more pessimism often signals a reversal. Everyone who could be short is short. A market that is not falling in the face of of worsening news is a strong market. That is why I think the risk is that the stocks will rally from here. Not that I am saying that is going to happen but that would definitely catch a lot of people by surprise. If the stock market doesn't start down soon I think we are in for a monster rally. Closing above 12,750 on the Dow would make me very bullish. Conversely, trading below 12,100 means the bear is still alive and must be respected.

Back to the bad news. The losses from the mortgage market are mounting and so is the estimates as to how much it will cost in the end. One trillion is the estimate from the IMF up from around 600 billion. Because of the uncertainty in when the bottom of the housing market will be reached banks are using liquidity to shore up their balance sheets rather than to lend. The Feds actions have been solely oriented towards keeping the financial system from going into a tailspin. I respect both sides of the 'suck it up' and financial debacle must be prevented all costs debate. A lot of innocent people would have been hurt if BSC had failed but the bubble needs to unwind. The Fed seems to be just trying to make sure the unwinding is as orderly as possible. What they are risking is that the gov't will become entangled in the process and taking on risks that don't belong on their balance sheets. The Fed is the lender of last resort but it should not be nations landlord.

What makes this an impossible job for the Fed is that the financial remedies they come up with will just continue to devalue the dollar and undo whatever good was done. Greenspan had an much easier time of buttressing the economy in 2001-2003. The dollar was strong and the unwinding stock market bubble was happening quickly in a visible way. The housing market and the credit market are opaque so the public is wary about jumping in while prices are heading down; another strike against the Fed being the creation of deflationary expectations.

What is ironic is that the panic has been most pronounced among the financial professionals. In this way the opaqueness of the credit market keeps the public from panicking. What the public could sell, stocks, has been relatively sheltered from the storm. I have given you my opinion from the technical side but I am really not optimistic and place the chance of a rally as a small percentage. Events can change that opinion. A falling stock market has the potential for getting out of control. The danger is that the public will lose faith in the Fed's ability to affect an orderly stock market decline.

P.S. Easy Al is fighting furiously to save his reputation. Kinda funny to him get what he deserves. He certainly didn't fight hard to stop the Maestro image at that time. Any more than he tried to discourage the stock or housing bubbles when he had a chance. The "I couldn't have foreseen this" argument won't fly. Too many told him about the problem and he ignored them.